Transcript

TICKY FULLERTON, PRESENTER: The ADC forum, formerly the Australian Davos Connection, kicked off in Melbourne today with a focus on China 2013: where to from here?

It's a good question following the Prime Minister's recent trip to China that earned her a new strategic partnership.

Well one China expert who's flown in for the forum from Beijing is Patrick Chovanec, the chief global strategist at Silvercrest Asset Management and he joins me now from Melbourne.

Patrick, welcome to the program.

PATRICK CHOVANEC, CHIEF GLOBAL STRATEGIST, SILVERCREST ASSET MGMT: Good to be in Australia.

TICKY FULLERTON: Now, can I ask you first, - because on this program we heard last week about warnings on bad loans in China coming from a senior official at China's accounting association This is something you've been quite vocal about when I've spoken to you before. Is it getting worse?

PATRICK CHOVANEC: Yes, it is. And we're starting to see the results of accumulating bad debt in this system. And one of the big results is that the burden of rolling over that bad debt is growing greater and it's sucking up more of the resources, particularly the credit resources in the system.

And that's one of the reasons why we saw even though there was a huge credit expansion over the past six months and particularly the first quarter of this year, it didn't really get much of a result in terms of GDP growth out of it.

TICKY FULLERTON: Well indeed, we had those disappointing GDP numbers, I think 7.7 per cent for the first quarter. What sort of report card on China are you bringing to Melbourne?

PATRICK CHOVANEC: Well China is really at an economics crossroads. It's at the crossroads that it's been really for the past four years and the question is whether it will make the adjustment that's necessary to have more balanced growth and less dependence on - or overdependence on investment. Unfortunately, the past quarter, the past couple of quarters, there's been a flood of credit to try to prop up investment and it doesn't seem like they're making the adjustment that's really needed and unfortunately it's producing less and less of a result.

TICKY FULLERTON: How do you think Australia is going at positioning itself, or put it another way: how exposed do you think we are to the China growth story?

PATRICK CHOVANEC: Australia's very exposed because Australia has ridden the investment boom that China's had for the past several years, providing the raw materials needed to fuel that investment boom. But China's investment boom is not really sustainable. And we are seeing a squeeze on investment growth and I think we'll continue to see that. And whether we see a hard landing or a soft landing, the direction of the Chinese economy is going to be towards less aggressive investment growth and that's gonna hit Australia.

Now, in one of your previous segments you were talking about the imbalance really in the Australian economy between on the one hand that resources were really driving growth and even perhaps to the detriment of manufacturing in other areas. So, that - you know, that poses a real significant adjustment for the Australian economy if that resource demand slows down.

TICKY FULLERTON: How meaningful do you see our Prime Minister's recent visit to China and securing this new strategic agreement?

PATRICK CHOVANEC: Well, Australia's in a kind of interesting position because like a lot of Asian countries, it's sort of finds itself on two tracks. It used to be that its economy and its security arrangements oriented it towards the United States. But now, because of the importance of China's economy, it finds that on the one hand, its economic interests are very much engaged with China, and on the other hand, like I say, like a lot of countries in the region - Japan, Vietnam, the Philippines - they nevertheless are concerned about what a stronger China means for the region and therefore are participating in the US pivot towards Asia and so that creates a tension in not just where Australia's place is, but where other countries find themselves.

TICKY FULLERTON: So how do you see in the medium term the stability of the Asian region, both economically and geopolitically?

PATRICK CHOVANEC: PATRICK CHOVANEC: Well I think China's economic transition really poses a short-term challenge for the region because it is the thing that people have been looking towards as a driver particularly for resources and machinery and things like that. A lot of countries have benefited from this huge investment boom, so that represents a challenge.

But also, China's greater assertiveness in the region, whether it's in the East China Sea with the Senkaku Islands with Japan or in the South China Sea, there is a very real possibility of a flare-up there. And we've already seen an impact on business, for instance with the Japanese seeing auto sales fall off dramatically in China and with the Philippines seeing sales of bananas and other goods that they sell to China fall off because of these political tensions.

TICKY FULLERTON: And Patrick, you're one of the few economists I know who's actually been into North Korea a couple of times. How significant do you see the current tensions there between North Korea and China?

PATRICK CHOVANEC: Well, you know, we've seen this before, actually. In 1994, after Kim Il-sung died and Kim Jong-il took over, there was a period of real concern that war would break out. And partly it was because there was a lot of sabre-rattling that took place on the North Korean side to try to consolidate - to consolidate power. Now, this is a game that the North Koreans play and they've played it for many years.

They - the challenge is whether they know where the red lines are. And especially since they're further along in their missile program and their nuclear program that they may inadvertently or even purposely try to play games in terms of where that red line is and cross it and that could have really catastrophic impact for the region.

TICKY FULLERTON: Let's hope that's a scenario that does not play out. Patrick Chovanec, thank you very much for joining us tonight.